Rising committed expenditure squeezing states' development spending: PRS

PRS Legislative Research says states spend over 60 per cent of revenue on salaries, pensions, and subsidies, limiting room for growth and welfare spending

Indian states are increasingly facing fiscal constraints that threaten their ability to fund growth-enhancing and crucial development programs, with 62 per cent of their revenue receipts in the financial year 2024 (FY24) spent on committed expenditures such as salaries, pensions, interest payments and subsidies, according to the annual ‘State of State Finances 2025’ report by PRS Legislative Research.

 

Drawing on budget documents and audit accounts of all states and select Union Territories, the report finds that 53 per cent of revenue receipts were consumed by salaries, pensions, and interest payments, while subsidies accounted for another 9 per cent in FY24.

 

Punjab topped the list with committed expenditure exceeding total revenue receipts at 107 per cent, followed by Himachal Pradesh (85 per cent), Tamil Nadu (77 per cent), Kerala (75 per cent), and Haryana (71 per cent).

 

“In 2025-26, states have estimated to spend 50 per cent of their revenue receipts on salary, pension, and interest payments. States such as Assam, Himachal Pradesh, Kerala, Punjab, and Tamil Nadu have estimated to spend more than 60 per cent on committed items,” the report added.

 

The report notes that high committed spending has forced many states to borrow even for recurring costs. This has pushed aggregate debt to 27.5 per cent of GDP, well above the 20 per cent recommended limit. Rising debt has also increased interest obligations, which consumed 13 per cent of revenue receipts in FY24, while a decline in un-tied transfers under the 15th Finance Commission has further curtailed states’ spending autonomy.

 

Raising similar concerns, Union Finance Minister Nirmala Sitharaman, speaking at the Delhi School of Economics on Tuesday noted that many states are spending roughly 70 per cent of their revenues on salaries and pensions, leaving only 30 per cent for developmental needs. This structural rigidity, she said, impedes growth and pushes states to borrow, even within fiscal limits. 

 

The report highlights that another emerging challenge is the proliferation of unconditional cash transfer (UCT) schemes for women. Twelve states now run such programmes, up from two in FY23, with a collective outlay of about ₹1.68 trillion in FY26. The report links these schemes to rising revenue deficits in half of the states implementing them.

 

The PRS report also highlights widening fiscal inequality between states. High-income states generate far greater per capita revenues than poorer ones, creating a “virtuous cycle” that enables richer states to invest more in growth and welfare, while poorer states fall further behind, entrenching regional disparities.

 

While state capital expenditure is being increasingly supported by central schemes like the Special Assistance Scheme for Capital Investment (SASCI), which provides 50-year interest-free loans to states for capital expenditure, the unconditional component of this assistance has declined in recent years.

 

“The shape of unconditional loans allocated to states under the scheme has reduced from 80 per cent in 2022-23 to only 38 per cent in 2025-26. With a lower share of unconditional funds available, states may have limited flexibility in determining their capital spending priorities,” the report noted.

 

The state debt burden remains another worrying area. The aggregate outstanding debt of states exceeds recommended thresholds, with debt servicing charges consuming an increasing share of revenues.

 

“Rise in debt levels also imply a growing interest payment burden. A higher debt servicing burden reduces states’ flexibility to spend on other revenue and capital items,” the report noted.